While 2 and 3 sound like very good points, does it make more sense for
1 to use the high res data but process it so that the end result is
small? That way you could still exceed the lower resolution for
really bumpy parts of the world, and still have great big polys for
the majority of the world, which is basically flat. In other words,
you can always reduce a data set, but usually you can't increase it.
Also, though I haven't worked with TerraGear, I suspect that for a
given size of desired output it would produce higher quality scenery
as the size of the input data set grows. Is this the case? I ask this
not as a criticism, but because I'm curious.

You make a good point. I think in the end the answer of which data sets
to use (or which data sets could potentially be used) depends on the
priorities of the scenery builder and their target application.